Back in the mists of last August, I mentioned the FSA Says, We’re Rubber, You’re Glue, It Bounces Off Us And Sticks To You! here that the FSA were looking newly buffed and getting punchy with the industry, right there in print. That buffing is reaffirmed in their latest exocet, Guidance Consultation 12-06, which came out today.
GC12-06 is the result of a wee deep-dive thematic review thingamajig some of the FSA cats did recently on two key areas for advisers – ‘replacement business’ (definition in a mo) and Centralised Investment Processes (CIPs, meaning everything from model portfolios to DFM usage and Distributor Influenced Funds [DIFs]).
Now, about 800 people read my last blog on fund supermarkets and RDR over the last couple of days. That, I’ll wager, is about as many folk as will bother to download GC12-06 and read it from cover to cover. And that’s a mistake. Because there is some dynamite stuff in there.
To the detail. FSA reviewed 181 client files as part of this sample. They found that 33 files constituted bad advice. That’s near enough 1 in 5. Perhaps more disturbingly, 103 files were so badly put together that the regulator couldn’t tell whether the advice was suitable or not. In 108 cases – 60% – the disclosure of costs was not adequate.
So let’s recap, because those numbers may be a little tricky at first glance. 20% of the clients surveyed were given bad advice. 57% of the client files were so bad no-one could tell what the hell was going on, and 6 out of 10 clients hadn’t been given all the information they needed to make an informed judgement.
All of us in this part of the industry should be pleased no-one will read this paper. This is shameful stuff. It reflects terribly badly on the sector, and is a real slap in the face to those advisers who are putting in the hours, doing the client files properly and getting it right. The worst part is that this pattern of bad advice, bad disclosure and bad record-keeping goes right back to the early beginnings of RDR. It was this stuff that led to much of the change that so vexes so may IFAs
OK, let’s do the top 5 things we need to worry about from GC12-06. In no particular order:
- Replacement businessÂ – (which means swapping one investment or product for a similar one). Not enough advisers are doing cost comparisons; still fewer are doing true comparisons. Where costs go up, there needs to be a clear reason why and the client needs to sign up to that. There’s a strong suggestion that firms might want to place a limit on the additional costs they’ll recommend. This is well-worn stuff from pension transfers.
- CIP / replacement business performance – if anyone is dumb enough to recommend a switch on the basis of future investment performance, you’d better be ready to show some evidence as to why that out-performance (net of charges) is likely. Really this covers any switch.
- CIP suitability – just because something’s called a ‘model portfolio’ doesn’t mean it’s the right model for everyone. FSA want to see per-client suitability assessment on file for the investment process, whether it be DFM, model ports, fund-of-fund, panel picks or whatever. Shoe-horning clients into a model because it suits the practice is strengstens verboten. The suitability of the model itself and the company providing it also needs proper (sorry) due diligence.
- Permissions – if you’re handing off the client to a DFM, the client must have a direct contractual relationship with that DFM. You can’t just sub-contract, as every time the DFM trades you’re stepping outside your permissions as in effect the DFM is doing it on your behalf. (We’re worried about how DFM and platform relationships are working and are doing a bit more on it; give us a shout if you want to know more).
- Conflicts of interest – be alive to the fact that if the company doing your risk modelling and client suitability checks also provides the CIP, there’s a vested interest there that could work against the client. Assess all parts of the proposition you offer, and look for areas where bias could conceivably occur. Once done, eliminate it or document it properly and then test regularly to see if the bias is occurring.
Smarter folk than me have pointed out that number 5 (section 4.25 in GC12-06) is pretty much a death knell for network DIFs and pretty much any CIP that gives commercial benefit to the network itself.
On the costs front, it is getting harder and harder to get true cost comparisons between products, platforms, investments and so on. Asset-specific projections, cash margin calculations (coming soon), hidden fund costs, switching charges and so on all combine to make it brutally difficult to get a true costing. Advisers need to find a method, probably using a third-party tool, to get as close to true real-world costs as they can and use that. Illustrations direct from providers, while necessary for file completeness, probably aren’t that much use as a basis for advice any more.
The feeling I’m left with is that advisers have been adopting centralised investment processes as an industrialised de-risking solution without thinking about the fundamental basics of client suitability. The FSA, as they have done so often of late, are pointing out that there are no short cuts and no soft options. Where advisers outsource a part of the advice process, they’re still responsible for it and need to take that seriously. Certainly more seriously than the 17 firms surveyed as part of this review seem to have done.